Human Capital: What It Is and What It Means in the New Economy

As we continue to explore the factors of economic mobility, acquiring a diverse chunk of human capital is arguably the most crucial factor of them all. So while we’ve all been indoctrinated to believe education stops when it’s time to “become an adult,” the truth is that we are going to have to dedicate our entire lives to learning in the knowledge economy. Get ready, fam.

Human Capital: What it be?

Human capital is the stock of skills, knowledge, experience, and other traits that individuals (as well as societies made up of individuals) can put to productive use and create economic value. In short, if social capital is who you know, then human capital is what you know.

Economists look at human capital in different ways. Some simplify it to mean the knowledge and skills that are directly part of the production process. The strength, for example, needed to fill UPS trucks with boxes at the shipping warehouse. Others embrace the complexity and categorize physical and mental skills as separate forms of human capital. Realistically, human capital is the capacity to adapt to a changing environment, work in organizations, and maneuver through a market-oriented economy.

It also comes from a variety of different sources. Namely, LeBron James was endowed with the biological, or physical, forms of human capital, that has undoubtedly helped in his athletic career. More importantly, like social capital, the quality of upbringing, community, and education all heavily contribute to human capital.

More is probably better

As you have probably figured out, this is pretty important. It affects the growth of wages, productivity, and the economy as a whole. Individuals with more human capital tend to have higher wages. Businesses that help cultivate the human capital of their workers tend to become more competent, more adaptive, and more productive. Further, societies that invest in developing human capital, particularly through compulsory education, usually see faster rates of economic growth. Economic growth is the holy grail for economists (and non-economists) as it is a telltale of improving quality of life and increased economic mobility.

Human capital, thus far, is extremely hard to measure. It is an intangible and dynamic asset that constantly changes, improves through time, and is acquired from all directions and angles. Currently, the only way to measure human capital is by calculating a return on investment. “Did I make a profit from my $50,000 human capital investm– err– college degree?”

Don’t worry, economists that do this for a living still can’t seem to get this calculation right and probably never will.

Learn till you die

For centuries, the consensus has been that education, as a source of human capital, offers a positive return on investment. Even before Plato popularized the idea of mandatory education, society leaders required parents to provide, at least, an informal education to their children and even created schools encouraging parents to enroll their children starting at six years old.

The education system today is modeled similarly, yet more formalized. But, to think that we can acquire all the necessary skills in the first 20 years of our lives in today’s economy is completely absurd. How we educate ourselves will have to be modeled like a workout regiment, in which it becomes a daily routine, for the rest of our lives.

Learning new skills, quickly and regularly, will prove to be fruitful in your efforts to accumulate as much human capital as possible. Through on-the-job training, online courses, and mentorships, we can learn new skills that can help us adapt to the changing economic landscape. The good news is that Daniel Coyle did a little research and found out that [most] geniuses are not born, they are bred. By strategically grabbing the skills by the horns, success is yours for the taking.

Here are five quick steps to use when you’re trying to add a new skill to the human capital toolkit:

1. Stare at who you want to become. By observing the pros at whatever you’re trying to learn, you get the model of who you have to be to get the skill.

2. Stealing the techniques, thoughts, and critical moves from those pros you’ve been staring at for a while.

3. Being willing to make mistakes in the process of learning.

4. Choosing Spartan over luxurious in your workspace and your resources. High-performing schools are often those that do not have luxurious distractions. This means, no, you don’t need two screens to learn how to code C++.

5. Finding a coach or mentor that will be critical of how you go about developing your skill. This will help not only with the learning of the particular skill, but it will help hone your soft skills as well.

Scientia potentia est

Although being able to yell out “Okay, Google” to your smartphone prior to asking a question is an admirable skill, we are going to have to diversify a bit.

For example, most new jobs will have some sort of technology component that we will have to be comfortable with using. But, we will also need to be comfortable with asking the right questions, thinking critically, analyzing concepts and leading a purposeful life. To do this, future employees (members of Gen Y and beyond) will need to be creative, collaborative, and have a mastery of non-cognitive skills, like self-motivation, self-control, and perseverance.

The “fake it till you make it” method of getting into the career of your dreams will work to an extent, but can quickly run out of steam without human capital. Having the non-cognitive skills coupled with some competency in the tech arena will help you quickly accumulate the necessary human capital to make sure you’re not displaced by automation or someone that isn’t a phony. The one thing computers can’t seem to beat humans at is the whole being human thing—which entails creating and collaborating.

This means that investing our money and time solely into STEM subjects will not be as rewarding in the coming years. The humanities and social sciences will prove to be helpful as they develop these critical thinking skills and spur the creativity needed to diversify our accumulation of human capital.

Our take

Whether the traditional education system continues to be propped up or if it begins to decline, we live in an era where we can learn almost anything at a low cost. We can take the reins on building our human capital by turning most activities we do into a learning experience. By doing this, we can create the lifelong habit of learning that will keep us up-to-date in the workplace.

Importantly, in a modern economy that is becoming more globalized, being able to continually learn and adapt to the changing landscape will be of paramount importance if we want to move up the economic ladder.

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Published by Kevin D. Gomez

Kevin D. Gomez is an Instructor of Economics at Creighton University and Program Manager at the Institute for Economic Inquiry. He received his B.S. in Economics and Statistics from Florida State University and his M.A. from George Mason University. Trying to pay it forward by helping noneconomists make sense of the crazy world.
View all posts by Kevin D. Gomez

2 thoughts on “Human Capital: What It Is and What It Means in the New Economy”

Human capital is just a component of the economic capital as a whole. Social, cultural, and financial capital is also needed. I think income mobility, though tied to income inequality, should be the focus. If folks have easier access to these types of capital, the easier they can move up the economic ladder.

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